2024-07-23 05:00:02
By Emily Bary
Analysts worry that the outages sparked by a CrowdStrike software update will lead to delays of new deals
CrowdStrike Holdings Inc. shares were extending their declines Monday as the effects of the company’s faulty software update continued to disrupt global technology and as at least two analysts downgraded the cybersecurity stock.
Guggenheim’s John DiFucci wrote that “there likely will be negative effects on its business due to the disorder across the world that CrowdStrike has caused, even if temporary,” as he cut his rating on the shares to neutral from buy in a note to clients titled: “Need Time to Let the Dust Settle.”
CrowdStrike’s stock (CRWD) is down a further 9% in Monday morning action, after falling 11% on Friday, as the market digests the continued impact of the incident. Cancellations of Delta Air Lines Inc. (DAL) flights have carried into Monday, for instance.
“The restoration of its reputation may take more time and will likely affect new business signings at least in the near-term,” DiFucci continued. While he thought that the reputation-oriented fallout was unlikely to hurt renewals in an meaningful near-term way, he worried the company could “at least” see some new deals delayed.
There is also some possibility that CrowdStrike loses out on “closely contested” deals because of the incident, he said. CrowdStrike on Friday blamed a content update for far-reaching disruptions to Windows-based systems.
BTIG’s Gray Powell also said that “the outage may have an impact on new customer wins and create deal delays” in a downgrade of his own.
He said he talked to five senior security executives after the incident and got more negative feedback than he was anticipating.
“While it is not stemming from a security incident (a good thing) [CrowdStrike] committed the ‘cardinal sin’ for any security vendor and negatively impacted the revenue generation of its customers,” Powell continued. He noted that current customers might seek larger discounts on renewals and ask for credits to compensate for lost business.
Powell lowered his rating on the stock to neutral.
Don’t miss: CrowdStrike CEO George Kurtz took a $43 million personal hit from stock’s drop
Guggenheim’s DiFucci noted that even before the incident, he saw some risk to CrowdStrike’s January-quarter consensus expectations, particularly on annual recurring revenue. Plus, he noted that even with CrowdStrike’s 11% selloff on Friday, the stock was still trading as the most expensive name within his software coverage on the basis of enterprise value to recurring revenue.
“We still have the utmost respect for the leadership team at CrowdStrike and believe that the company will eventually become even stronger as a result of this incident, and if investors have a multi-year horizon, they can ride it out,” he wrote. “However, we find it difficult to tell investors that they need to buy [CrowdStrike] right now.”
Some other analysts late last week had suggested investors buy the stock on weakness.
More: Should you buy CrowdStrike’s stock now? This may be a ‘one-time discount sale.’
“CrowdStrike continues to focus on restoring all systems as soon as possible,” the company said in a Sunday tweet. “Of the approximately 8.5 million Windows devices that were impacted, a significant number are back online and operational.”
Read: Delta cancellations extend into a fourth day
DiFucci noted that the CrowdStrike incident raises questions for the broader software universe as well. For instance, he broached the possibility of “some negative fallout” for consumption-based software companies such as Snowflake Inc. (SNOW) and Datadog Inc. (DDOG) given the general business disruptions on Friday. Additionally, he wondered whether the incident would give companies and investors pause about artificial intelligence.
“What about the risk that an AI model simply makes a mistake that has far reaching implications?” DiFucci asked.
-Emily Bary
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07-22-24 0955ET
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